Political Economy, Political Theory and History

More thoughts on the dismal science

This post is a continuation of my commentary on Bryan Caplan’s book The Myth of the Rational Voter. Previous posts have set up some general criticisms of the book. This post engages a bit more systematically with some of the evidence analysed in the book that support Caplan’s conclusion that average people display a systemtic misunderstanding of the economy and that economists should therefore have greater power over economic policy. In chapter three, Caplan analyses the ‘evidence’ found in the SAEE and arrives at a number of contestable and rather weak conclusions. In particular, Caplan looks at a couple of questions that he believes displays a systematic ‘anti-foreign bias’ amongst the public. The first question refers to foreign aid and the second refers to the offshoring of jobs. The way Caplan approaches these questions is instructive. First, Caplan addresses the divergence between economists and the public on the problems of foreign aid by appeal to empirical data. Economists know it is not a problem for the economy because the percentage of the budget spent on foreign aid is insignificant. But when it comes to workers’ concern over sending jobs overseas, Caplan retreats into the realm of theory: the ‘lack of concern’ expressed by economists ‘with jobs going overseas is more theory-driven.’ The so-called ‘Law of Comparative Advantage’ tells economists that jobs go overseas ‘because there are more remunerative ways to use domestic labor (p.66).’
What is curious about this claim is the way it obfuscates agency in the capitalist economy. A company closes its domestic factory down and lays off its workers, sends those jobs overseas (presumably to a lower wage labour market, such as Mexico in the case of automotive jobs) because there are ‘more remunerative ways’ (read: other potentially higher paid domestic jobs available to those laid off workers) to ‘use domestic labor’. A sceptical observer may raise the question of who provides these new jobs to the recently unemployed workforce. Is it the same company that just laid off its domestic workforce to send jobs overseas? That hardly seems plausible. Perhaps it is by another company that somehow convinces that company to lay off its workers so it can offer them higher paid jobs in a different sector of the economy? Caplan’s claim makes no empirical sense; that is why he has to retreat to the realm of theory to convince us that it makes logical sense in light of a supposed ‘law’ of comparative advantage. Caplan chides the ignorance of the public who believe that companies ‘conspire’ to raise prices (an expression of the so-called anti-market bias), yet expects us to believe that those same companies collude with one another to reward the laid off workers of other companies with ‘more remunerative’ forms of work. In the real world, what happens is those laid off workers tend to find it difficult to find work that pays the same as the job they lost, let alone find work that pays more. While it may be true that higher paying, higher value added jobs may appear to compensate the loss of other forms of work (and this is disputable), this does not mean that laid off blue collar workers will ever be able to get those jobs. Skills, educational attainment, age and location may all play a role in preventing those laid off workers from being able to get those jobs. More likely, and we know this by looking at employment statistics, laid-off blue collar workers end up permanently redundant, or they find lower paid jobs. So whose view is correct? Does the public suffer from ‘anti-foreign bias’? In some cases, maybe; in other cases, like the one I’m discussing here, perhaps it is the economist who suffers from anti-reality bias. Again, the public looks at the ‘economy’ from the perspective of their lived experience within geographically situated labour markets while economists like Caplan look at the economy as an abstract market in which labour, capital and resources can flow with ease.

Caplan displays a similar attitude when it comes to what he calls the ‘make-work’ bias. ‘Everyone … who suffers from make-work bias’, says Caplan, ‘reviles a profitable firm that downsizes in order to be more profitable (p.67).’ The make-work bias stems from the ‘illusion that employment, not production, is the measure of prosperity (p.67).’ ‘In contrast, for economists and the Enlightened Public, downsizing proves the rule that private greed and the public interest point in the same direction. Downsizing superfluous workers leads them to search for more socially productive ways to apply their abilities (p.67).’ This is a rather astonishing statement. The key phrase here is the claim that laying off workers ‘leads them to search for more socially productive ways to apply their abilities.’ But is this really what workers do when they find themselves out of work? Do they re-enter the labour market looking for ‘more socially productive ways to apply their abilities’? Or do they merely look for work, because in the immediate term, bills need to be paid, the rent is due, the children need to be fed, etc.? This even presumes that ‘more socially productive ways to apply their abilities’ are available. The average working public, therefore, are misguided when they view prosperity from the perspective of employment as opposed to productivity, because according to Caplan, labour saving technologies that put people our of work will be compensated elsewhere in the economy by the growth of new, higher paying jobs.

‘The public’s default is to expect things to get worse. The good old days are gone; since the 1970s, stagnation and decline have been our lot. “McJobs” fit neatly into this worldview. As usual, economists think that the numbers contradict the public’s extreme pessimism…The progress of recent centuries implies that it is abnormal for new jobs to be low-paying. A temporary setback is possible, but it merits an intellectual double-take (73-4).’

That’s it. That’s all Caplan has to say about the matter: ‘The progress of recent centuries impliesthat it is abnormal for new jobs to be low-paying’ (added emphasis). However, an implication is far from a convincing argument. Caplan wants it both ways: on the one hand, he marvels at capitalism’s tendency to implement labour saving technologies that reduce the cost of labour inputs and therefore drive down prices; yet at the same time, he wants to deny that a result of this process is to drive down the cost of labour. In his fantasy world, labour saving technology reduces the absolute numbers of workers employed in a factory, freeing them up to do assume alternative, higher paying jobs elsewhere. In reality, what often happens is that labour saving technology results in a kind of de-skilling in the labour process; perhaps the same number of workers may be employed at lower wages at twice the productivity. Caplan’s analysis would benefit from the literature on the service sector economy. Does he seriously think that the dramatic shift to lower paying jobs in the service sector is a ‘temporary setback’? How long is temporary? And what is abnormal about the introduction of lower paying jobs? What is considered to be normal? All of this presumes, of course, a belief that capitalism creates better and better jobs. Once again, the reality is not so simple.

Lest I appear to be too harsh on Caplan, his treatment of public attitudes to wage growth and the standard of living demonstrates just how out of touch economists like him are with the lived reality of real people in the economy. And this stems from the dodgy measures that economists often use to measure economic growth and equate that growth with prosperity.

Take Caplan’s analysis of popular attitudes to household income. The ignorant, pessimistic public believe that household incomes have lagged behind over the past 20 years (from 1976-1996). Economists disagree. Caplan explains the public’s ignorance as a result of their confusion between medianand mean household incomes.

Caplan is frustratingly sophistic on this issue. He says the question asks about average family incomes (mean), not the income of average families (median). When inequality is rising, the latter can go down while the former can rise. The ignorant public don’t understand this distinction. As a result, Caplan suggests that the lay public thinks that the mean (average) household income fell, when in fact it rose. Once again, those silly lay people are suffering from pessimistic bias. But anyone familiar with basic measures knows that the mean often presents a distorted picture, one that is easily skewed by outliers in the extremes of the cases being measured. All it takes is for a massive increase in the household income of a small number of extremely wealthy households to show a rise in mean family income while a majority of households experience a decline. In this case, the median household income is a more accurate measure, as it indicates – and Caplan admits this – the income of average households. And for the lay public, who will no doubt fall into the category of average households, this is the only measure that really counts. And it reflects a reality that is skewed by the measurements preferred by economists. Caplan’s analysis does not demonstrate that the public is wrong; it demonstrates that economists look at household income from a perspective that privileges skewed income distributions. In other words, the public’s response to this question accurately reflects the reality that the income of working class households has declined over the course of the last twenty years. The response by economists, on the other hand, indicates that this downward trend has been offset – according to their measures – by an increase in the incomes of top earners. In other words, mean household incomes have risen because of the rising inequality that has seen top earners profit at the expense of average – median – working class earners.

We see a different problem with the way Caplan addresses the non-growth of real wages. The data that Caplan presents on real wages demonstrates that all responses indicate that they have lagged behind the rise in the cost of living. The difference is only in the extent to which they have lagged behind. Economists tend to downplay it, while recognizing that they have declined. Economists and the public are also in agreement that households need two incomes to survive, they just disagree on the extent that this is true. So what does this prove about the differences between economists and the public? Nothing. Caplan tries to spin it in favour of the economists’ response, but it is very unconvincing. Things aren’t that bad, he says. Just buy a less expensive home or delaying buying a new car (which presumes that one is buying a new car for reasons other than the fact that their old one is in disrepair); part-time work will do:

‘it is hard to stop an economist from expecting rising living standards in the medium- or long-term future. Critics hail this as proof of their dogmatism. Yet the presumption of progress does not come out of thin air. Two centuries of awesome economic growth back it up (p.77).’

Caplan closes the chapter by defending his use of the data to demonstrate that the public suffers from systematic bias. But he does this in a disingenuous way. He resorts to the public’s factually incorrect knowledge of uncontested budgetary facts: for example, public ignorance of how much of the budget is devoted to foreign aid. The fact that a majority of respondents got the facts wrong is then used to validate the idea of systematic bias that in turn invalidates their responses to questions that are dependent upon contested measurements favoured by economists.

But most of the arguments he uses to defend his use of the survey are irrelevant because they do not address the most important issue: the survey only demonstrates that economists and the public are out of synch with one another on issues related to the economy. That is hardly a controversial finding. But more importantly, it does not tell us anything about the veracity of the responses by the public, because again, we cannot make the leap that Caplan makes: demonstrating factual errors regarding uncontested facts to argue for factually erroneous interpretations of contested economic phenomena. So we can accept Caplan’s defenseof his use of the survey and still insist that it does not support his overall thesis.

Despite demonstrating some awareness that the evidence may in fact be used to conclude that the economists are wrong, Caplan falls back on his straw man characterization of the critics of the economics profession; he effectively restates what he considers to be the two main criticisms: that economists are rich and conservative and their findings reflect those facts. He does not, however, address the more far-reaching criticism that I have presented here: that it is precisely in the assumptions, methods and measures of the economics profession that systematic bias or error is to be found. Caplan thus concludes by validating the claims that he made at the beginning of the book: ‘the naive “economists right, public wrong” interpretation is usually the best (81).’